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Why was the Euro Weak? Markets and Policies
Daniel Cohen Department and Laboratory of Applied and Theoretical Economics (DELTA) ; Centre for Economic Policy Research (CEPR) Olivier Loisel National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP) December 2000 CEPR Discussion Paper No. 2633 Abstract: Against all odds, the euro turned out to be a weak currency. We argue that this outcome can readily be explained by the policy mix that was chosen at the onset of the period: tight fiscal policies following the convergence mechanism that was imposed by the Maastricht treaty and loose monetary policy that resulted from the convergence of interest rates to the lower point of the spectrum. We investigate this outcome empirically and show that the euro's weakness can be understood as the result of an excess supply in the zone, which is channelled abroad in the usual 'beggar thy neighbour' way. We also outline how an optimal policy mix could be set in the future and discuss a suggestion that has been made by Alessandra Casella on the proper way to determine the fiscal deficit of the zone.
Keywords: Euro, policy coordination JEL Classifications: F31 Working Paper SeriesDate posted: January 29, 2001 ; Last revised: March 09, 2001Suggested CitationContact Information
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